8.8 to 8.9

Question 1

What is a joint venture?

Answer 1

Where control is shared by two or more investors

Question 2

What is a joint venture typically used for?

Answer 2

Often used to invest in foreign markets, special projects or risky ventures

Question 3

What accounting method is used for joint ventures?

Answer 3

IFRS and US GAAP require the equity method

Question 4

What other methods are permitted?

Answer 4

1. US GAAP and IFS allow the proportionate consolidation method, but in rare circumstances
2. It is similar to the acquisition method, except the investor only reports the PROPORTIONATE share of assets/liabilities on the BS and revenues/expenses on the IS
3. Since only the proportionate share is reported, there is no minority interest

Question 5

What impact does the proportionate consolidation method have on the financial statements?

Answer 5

1. Higher assets and liabilities vs equity method
2. Net assets (shareholder’s equity) is the same as the equity method
3. Higher revenues and expenses, but net income is the same

Question 6

What is a special purpose entity (SPE)?

Answer 6

A legal structure created to isolate certain assets and liabilities of the sponsor

Question 7

What form can a SPE take?

Answer 7

A corporation, partnership, joint venture or trust

Question 8

What is the motivation of launching a SPE?

Answer 8

To reduce risks and thereby lower the cost of financing

Question 9

How is a SPE structured?

Answer 9

So that the sponsor has control over the finances and operating activities while a third party(s) have controlling interests in the SPE’s equity

Question 10

What is a VIE?

Answer 10

1. A VIE is a SPE that meets certain conditions. It must have at least one of the following characteristics:
2. At risk equity that is insufficient to finance the entity’s activities without additional financial support
3. Equity investors that lack ANY of the following; decision making rights, obligation to absorb losses, right to receive residual returns

Question 11

How is a VIE consolidated?

Answer 11

1. it must be consolidated by the primary beneficiary
2. The primary beneficiary is the entity that absorbs the majority of the risks or receives the majority of the awards

Question 12

What is the treatment of contingent assets and liabilities under IFRS?

Answer 12

1. Contingent assets are never recognised
2. Only contingent liabilities that can be measured reliably are recognised at acquisition. In subsequent periods, the liabilities are measured at the HIGHER of initial value or the amount needed to settle the liability

Question 13

What is the treatment of contingent assets and liabilities under US GAAP?

Answer 13

1. Contingent A&L’s are divided into contractual and non-contractual
2. Contractual are recorded at fair value at acquisition
3. Non-contractual are only recorded IF they meet the definition of an asset or liability
4. Subsequent measurement of liabilities follows IFRS, while assets are recognised at the LOWER of initial value or estimated future settlement amount

Question 14

What is the treatment of R&D?

Answer 14

In process R&D is capitalised as an intangible asset and included as an asset under IFRS and US GAAP
It is then amortised if successful, or impaired if unsuccessful

Question 15

What is the treatment of restructuring costs?

Answer 15

They are expenses as incurred under IFRS and US GAAP

Question 16

How does net income differ for equity / proportionate consolidation / acquisition method?

Answer 16

All three methods report the same net income

Question 17

How does equity differ for equity / proportionate consolidation / acquisition method?

Answer 17

1. Equity and PC will report the same equity
2. Acquisition will report higher equity by the amount of the minority interest

Question 18

How do assets and liabilities differ for equity / proportionate consolidation / acquisition method?

Answer 18

1. A&L’s are highest under the acquisition method
2. A&L’s are lowest under the equity method
3. PC is somewhere between acquisition and equity method

Question 19

How do revenues and expenses differ for equity / proportionate consolidation / acquisition method?

Answer 19

1. R&E’s are highest under the acquisition method
2. R&E’s are lowest under the equity method
3. R&E’s somewhere between acquisition and equity method